Key Themes For Pharmaceuticals & Healthcare In 2018

In 2018, pharmaceutical companies will continue to face an increasing number of external risks to their operations. In an era of fiscal pressures, governments are seeking to control growth in healthcare spending and will disproportionately target expenditure on medicines with mechanisms such as pharmacoeconomics. Furthermore, the relocation of the EMA will lead to significant regulatory hurdles for companies operating within the EU and the neighbouring markets - a large proportion of the global pharmaceutical market. The key internal business risk for drugmakers will remain the failure of product candidates in late-stage clinical trials.

The pharmaceutical sector is expected to have a challenging 2018. In the US, tax reform will reduce new treatments for rare diseases. Concerns over the continuity of the operations of the European Medicines Agency (EMA) will escalate. With growing and ageing populations across the Central and Eastern Europe (CEE) region, healthcare funding is coming under increasing strain. Reduced economic activity in the Latin America region is likely to have knock-on effects on pharmaceutical market growth, while greater political uncertainty may stall much-needed legislative development. Despite these issues, we also see bright spots in the sector in 2018. Increasing efforts from the governments in the region to develop the Asia Pacific pharmaceutical sector will bode well for the market's attractiveness to investors. Additionally, we expect 2018 to deliver notable regulatory progress in the pharmaceutical and healthcare-related space in Africa - including the launch of the African Medicines Agency.

The US: Tax Reform Will Reduce New Treatments For Rare Diseases

A tax overhaul bill which is being hammered into its final form (in December 2017) by Senate and House Republicans is all but certain to cut tax credits designed to encourage development of orphan drugs meant to treat rare diseases afflicting a limited numbers of patients. Under current law, a drug manufacturer may claim a credit equal to 50% of qualified clinical testing expenses. Many drugmakers have sought this incentive and more than 400 orphan drug designations have been granted by the US FDA in 2017. Without tax credits and other inducements, such as an accelerated approval process, developing drugs for rare diseases would not be commercially viable.

According to the Joint Committee on Taxation, elimination of tax credits for developing orphan drugs would increase revenues by USD54bn over 2018-2027. In comparison, R&D expenditure by the leading pharmaceutical companies is forecast to exceed USD90bn in 2017 alone. If the tax credits for orphan drug clinical trials are repealed, overall drug development investment is unlikely to be significantly affected, but the number of orphan drug designations will fall sharply in 2018 and in subsequent years.

Western Europe: Concerns Over EMA Business Continuity To Escalate

In 2017, one of the biggest issues facing the European pharmaceutical industry following the UK's decision to leave the EU was the future location of the European Medicines Agency (EMA). In early November 2017, after months of consultations, it was announced that the EMA will relocate to Amsterdam in the Netherlands. The Agency now has just over 16 months to prepare for the move and take up its operations in Amsterdam on 30 March 2019 at the latest. It is our view that in 2018, there will be increased dialogue between the EMA and different stakeholders, including drugmakers, patient groups and national regulatory bodies, to ensure that the Agency can continue to deliver on its mission and protect public and animal health after the UK leaves the EU.

The EMA is responsible for approving medicines for all EU countries, including drug safety monitoring and marketing authorisations. This results in a single marketing authorisation that is valid in all EU countries, as well as in the European Economic Area (EEA) countries of Iceland, Liechtenstein and Norway - a market of around half a billion patients. The relocation of the EMA will impact the entire European pharmaceutical market, potentially slowing down the drug approvals process, leading to approval delays and subsequently hurting company revenue streams.

2018: Increased Scrutiny On EMA Operations

The EMA's Mission

Source: EMA, BMI

In order to prepare for its relocation, the EMA has been working on a business continuity plan aimed at ensuring that the assessment of medicines is not disrupted and that patients in Europe continue to have access to high quality, safe and effective medicines.

Since November 2016, the EMA has carried out several staff surveys to help the Agency prepare for staff losses and to improve planning for succession and knowledge transfer. The EMA has stated that some staff losses can be absorbed with its business continuity plan, but beyond a critical threshold the Agency will no longer be able to fulfil its mandate to protect the health of European citizens. In 2018, there will be questions about how the EMA plans to maintain current staffing levels and on the recruitment of additional skilled resources to compensate for staff loss as a result of the relocation.

The EMA has an important coordinating role across the European Medicines Regulatory Network, and provides the administrative and scientific secretariat to all of the main scientific committees and working parties, giving the agency access to a pool of over 4,500 experts across the network. In April 2017, the EMA initiated discussions with the national competent authorities on how work related to the evaluation and monitoring of medicines will be shared between Member States in view of the UK's withdrawal from the EU. In June 2017, the EMA's Management Board endorsed principles and a working methodology to successfully undertake a distribution of the workload on the evaluation and monitoring of medicines to ensure high-quality scientific assessments and compliance with legal timelines. The Management Board endorsed the mandates of two working groups, one focusing on human medicines and one on veterinary medicines - that will explore options for a robust allocation of the workload across the European medicines regulatory network and ways to streamline work and further increase capacity in the network. In 2018, the EMA will need to continue to provide drugmakers with information regarding its evolving business continuity plan in order to ensure that companies are ready to take the necessary steps to enable an undisrupted supply of their medicines.

Central And Eastern Europe: Shifts In Healthcare Financing

With growing and ageing populations across the region, healthcare funding is coming under increasing strain, resulting in the implementation of policies to increase the efficiency of expenditures while also improving the quality of, and access to, care. In the more developed Central European markets, cost-containment measures have been widely employed, with the pharmaceutical sector targeted as a politically palatable area for efficiency gains. In the emerging Eastern European markets, focus will remain on striving for universal access to healthcare; this will create considerable challenges for highly inefficient healthcare systems, many of which remain based on the former Soviet Semashko system with minimal healthcare infrastructure outside of major cities.

In 2018, we anticipate that a number of countries will seek to redress these funding issues by shifting their healthcare financing model. This will predominantly occur in the Commonwealth of Independent States (CIS) region, where the adoption of mandatory health insurance systems is growing in popularity. This system, widely viewed as the cheapest and simplest form of healthcare system to run, should enable greater equality in healthcare provision by providing a basic level of services covered by the state. Azerbaijan implemented a pilot mandatory health insurance programme in October 2017 in two regions which is set to be expanded to additional regions in mid-2018. This pilot programme is intended to assist in the development of the Compulsory Medical Insurance Act which will ensure coverage for the entire country and is hoped to be implemented in 2019. Kazakhstan also intends to roll out its own mandatory health insurance scheme on January 1 2018. Moreover, in October 2017 the Ukrainian Parliament passed a bill to reshape the current healthcare system to an insurance-based model operated through a state-run National Healthcare System (NHS). This bill is due to enter into force at the start of 2018, whereby the state will guarantee primary care and during 2018-2019 the programme is planned to be expanded through pilot programmes for secondary and tertiary care.

Given the more developed nature of healthcare systems in Central Europe, the majority of markets will not see widespread reform but an increase in cost-containment measures to improve spending efficiency. However, the ruling Law and Justice (PiS) Party in Poland plans to implement a radical overhaul of the country's currently highly inefficient insurance-based system to a tax-based system in 2018, and a new healthcare financing bill is under consultation by Latvia's parliament and is set to be passed in 2018 before the changes are implemented at the start of 2019.

These reforms in general can be seen as positive in the long term. However, in the short term, improving access to services to a larger proportion of the population whilst also improving the efficiency of spending to release more funds for the purchase of medicines will be challenging. Changes to healthcare administration are likely to create uncertainty in medicine tenders, for example. Moreover, we note that the implementation of wide-ranging healthcare reforms is rarely a smooth process and anticipate a significant amount of political opposition to changes, as well as delays to programme implementation.

Asia Pacific: Pro-Domestic Policies Will Bode Well For Market Opportunities

Recognising the revenue earning opportunities in the APAC region, investment into localised production by multinational pharmaceutical companies will remain strong. Increasing efforts from the governments in the region to develop the pharmaceutical sector will bode well for the market's long-term attractiveness to investors. A number of government-led initiatives have been rolled out in APAC over the course of 2017, many of which will have important ramifications for the pharmaceutical industry in 2018 and beyond. For instance, governments across the region have sought to implement sector-focused innovation plans to boost investments in manufacturing bases, predominantly through the creation of pharmaceutical manufacturing zones, lifting the cap on foreign ownership, providing tax breaks along with R&D grants. Moreover, the efforts to improve the drug regulatory proceedings and expedite drug approvals in the major markets of the region, including for biologics, will also support a greater multinational presence in 2018.

While the broader trend of boosting domestic manufacturing capabilities represents an ongoing theme, we expect 2018 to deliver notable progress in a number of pharmaceutical-and-healthcare-related areas. In line with the Pharma Vision 2020 document of the Department of Pharmaceuticals, India has embarked on its journey to become a leading country for end-to-end manufacturing and innovation. The government aims to augment infrastructure through the 'Make in India' initiative, improve the quality of the workforce and increase funds for innovation. Specifically, the government aims to position India as one of the top five pharmaceutical innovation hubs by 2020. Moreover, the Chinese government is actively involved in boosting innovation and injecting significant investment in the sector. The announcement of the 13th Five-Year Plan has provided further momentum to innovation and reform in the country, with biomedicine being identified as a key priority. The South Korean government is also planning to set up high-tech medical industrial clusters by 2018 and foster a culture of innovation.

Besides supporting a greater multinational drugmaker presence, local pharmaceutical firms in APAC will also benefit from greater government support as a means to lower the country's import bill, boost domestic companies' manufacturing capabilities and improve the local medicine supply. Local drugmakers have a competitive advantage in that they have a local presence, which means they are well-placed to benefit from government initiatives to support the domestic industry.

It has been our longstanding view that APAC will remain an attractive destination for pharmaceutical investment by multinational drugmakers, and we expect that improved government commitment to the sector's development in addition to an already well-established manufacturing industry for pharmaceuticals will ensure it remains a key target in 2018. Governments will seek to boost their domestic pharmaceutical manufacturing industry to reduce the reliance on imported drugs, which can be highly sensitive to currency fluctuation. As such, in 2018, we expect that governments across the APAC region will establish a number of progressive reforms and new manufacturing zones as part of its drive for innovation and technology, with the pharmaceutical sector being a key component.

Africa: The Launch Of The African Medicines Agency

In Africa's pharmaceutical and healthcare markets, ongoing trends are expected to persist, including those of expanding universal health coverage and the push for self-sufficiency in medicine production, which are increasingly being prioritised by African governments. In 2018, the pharmaceutical landscape will be further impacted by the evolving medicine regulatory environment, with the African Medicines Agency (AMA) scheduled to be fully operational in the year ahead. This, in conjunction with a number of sub-regional and country-level regulatory developments in Africa, will advance in 2018, shaping future opportunities for generic and innovative drugmakers in the region.

While the broader trend of gradually improving regulatory standards represents an ongoing theme in Africa, we expect 2018 to deliver notable progress in the pharmaceutical and healthcare-related space. Underpinning this view, at the 67th WHO Regional Committee for Africa Summit in September 2017, the African Union (AU) confirmed that the AMA will be officially launched in 2018. Upon further consultation in the months leading up to 2018, an AMA treaty will require endorsement from the AU heads of state in 2018, after which signatures from at least 15 AU member states are required for the agency to become fully operational. While this process is subject to delays given its complexity and the historic lack of collaboration between African medicine regulators, 2018 will mark a significant year in the process of establishing a pan-African drug regulatory body.

Modelled on the workings of the European Medicines Agency (EMA), the AMA will not replace national medicines regulatory authorities, but instead act as a complementary agency that oversees regulatory processes across the region, according to Dr Janet Byaruhanga, director for social affairs at the AU Commission. Part of the AMA's responsibilities will include reviewing national medicine regulatory processes, strengthening pharmaceutical distribution networks throughout the region, ensuring locally produced medicines are competitively produced, and providing technical support and expertise to national regulatory centres. In addition to assessing multi-country clinical trials, the AMA will also conduct inspections of drugmaker manufacturing standards to ensure GMP compliance. Improving the regulatory environment will serve to reduce the prevalence of substandard counterfeit drugs, improve the reputation of Africa's domestic drugmakers and create a more investment-friendly business environment for external organisations. In particular, this could increase the number of WHO-prequalified drugmakers, which is a prerequisite for tenders with international donors such as GAVI - the Vaccine Alliance.

We highlight that one of the largest challenges threatening the success of the AMA is whether the region has the capacity and level of cooperation to implement it. Coordinating the existing medicine regulators in a region marred by bureaucracy and limited enforcement mechanisms will threaten the realisation of the AMA's establishment over the near term. Taking this all into consideration, while we recognise the AMA as a hugely positive step towards improving the pharmaceutical regulatory environment in Africa in 2018, it will remain a high-risk environment for multinational drugmakers.

Alongside the AMA's development, we highlight the broader trend of cooperation amongst regional economic groupings in Africa as a concurrent trend. Supporting our theme of harmonising regulatory agreements in the continent, the African Continental Free Trade Area (CFTA), the East African Community Medicines Regulatory Harmonisation (EAC-MRH) programme and the Economic Community of West African States (ECOWAS) medicine registration agreements all typify the move towards harmonising regulatory requirements in Africa. Although we expect this to continue due to increased efficiency and transparency in policymaking, we highlight that underlying issues will remain firmly in place, deterring innovative drugmakers.

Middle East: Regional Factors To Drive Diversification Efforts

In 2018, as the recent era of lower oil prices continues to weigh on government revenues in the Middle East, diversification within the non-oil sector will come to the fore, with implications for the region's pharmaceutical and healthcare industry. We expect this theme to play out primarily in the Gulf Cooperation Council (GCC) states, which are the most vulnerable to oil price fluctuations given the dominance of the hydrocarbons sector in their economies. Government expenditure on healthcare accounts for a large proportion of total healthcare expenditure in these states as the sector has an important role in maintaining social stability.

While economic diversification in the GCC is expected to focus heavily on manufacturing, financial services and transport, a number of states have announced their intentions to prioritise the pharmaceutical and healthcare sector:

In line with Saudi Arabia's National Transformation Plan 2020 and 'Vision 2030', the government has outlined various plans concerning the healthcare sector, including actively encouraging and expanding private sector health services through measures such as the approval of loans for the construction of private hospitals and multi-disciplined health facilities.

In October 2017, the UAE signed 12 Memorandums of Understanding (MoUs) across 11 industry sectors, including with multinational drugmaker Pfizer, for the creation of a 'UAE Centennial Area' in Dubai. The aim of this project is to create a new production hub for various non-oil industries including the pharmaceutical sector, as well as to strengthen partnerships between the UAE government and various research-based foreign drugmakers.

In a related development, the 'Dubai Industrial Strategy', of which pharmaceuticals is one of the six key initiatives, is pursuing a number of short-term targets in 2018 for expanding the Emirati's drugmaker manufacturing facilities.

In line with Kuwait's economic diversification plans, the government is aiming to attract private companies to invest in the form of public-private partnerships (PPPs) for healthcare.

Oman has a number of privately-funded healthcare projects in the pipeline for 2018, including a hospital project being built in Muscat by a Spanish healthcare provider.

We highlight that many of these developments will come to the fore in 2018, alongside future announcements, yet this theme represents a longer-term trend that will continue beyond 2018 in the Middle East. This will be supported by gradually recovering oil prices supporting governments' ambitious diversification plans, as well as the focus on improving self-sufficiency in the pharmaceutical and healthcare sector.

While we expect economic diversification efforts to benefit the Middle East's pharmaceutical and healthcare markets in 2018, economic and political instabilities in the region could delay the progress of certain reforms. The attractiveness of the region to multinational drugmakers will continue to be shaped by a combination of factors in 2018, and we highlight key intra-country nuances as crucial factors determining the level of company interest. We maintain our view that the larger markets of the GCC will remain the most attractive investment destinations to drugmakers in 2018, given their relative level of economic development and medicine sales potential.

Latin America: Volatile Political Environment Poses Downside Risks

The year 2018 will be a year of heightened political risk for the Latin America region according to BMI's Country Risk team, and this suggests significant downside risks to economic growth and policy continuity. We note that these risks will create additional challenges for multinational pharmaceutical firms operating in the region. Reduced economic activity is likely to have knock-on effects on pharmaceutical market growth, while greater political uncertainty may stall much-needed legislative development.

Our Country Risk team highlight that a significant number of elections will be held in 2018 in Latin America: in Brazil, Mexico, Colombia, Paraguay and Costa Rica. There is currently a swell of antipathy towards the established political parties across the region due to a series of corruption allegations as well as sluggish economic growth and wide income inequality. This sentiment has emboldened anti-establishment parties, many of whose economic views remain uncertain. Wider regional economic weakness will create significant headwinds to pharmaceutical market growth given the high levels of out-of-pocket payments in healthcare spending. In addition, greater representation in government by these parties will hinder legislative processes, delaying policy development and repressing economic growth by undermining the shift towards pro-investment policy.

Faith In Government At Rock Bottom

Latin America - Opinion Poll: % Of Respondents Who Believe Government Works For The Majority Of People

Source: Latinobarometro, BMI

Moreover, Venezuela's economic crisis is set to continue through into 2018, and BMI's Country Risk team believe that this may result in a hard default on its sovereign debt. This would create greater political uncertainty and prevent an easing of the current situation where there is a severe shortage of medicines. We note that almost every major multinational pharmaceutical firm has now removed Venezuela from their top-line financial results.

In Central America, US President Donald Trump's restrictive immigration policies will also generate headwinds to economic growth and political stability. Specifically, the restrictions on Central Americans' ability to live and work in the US will reduce remittances, leading to weaker private consumption in the region. Again, this will pose downside risk for medicine consumption growth, particularly given the high degree of market reliance on out-of-pocket payments for drugs.

Argentina is likely to be a bright spot in the region in the face of these risks as the liberalisation under President Mauricio Macri will support accelerating economic growth, led by investment and consumption. Having secured a strong mandate in October 2017 legislative elections, reform progress will pick up pace in 2018. Macri's Universal Health Coverage plan is due to be implemented in 2018, starting in the cities of Guaymallen and Mendoza, followed by Santiago del Estero and Buenos Aires before being rolled out country-wide.